Wells Fargo

Wells Fargo Shares Plunge as Q4 Revenue Disappoints

The United States’ fourth-largest bank Wells Fargo’s profit modestly beat consensus estimates for the fourth quarter, but its revenue fell short of market expectations, sending its shares down over 7% on Friday.

The San Francisco-based financial services company reported a net income of $2.99 billion, or 64 cents per share, beating the Wall Street consensus estimates of 58 cents after missing expectations in the last six consecutive quarters. The company’s total revenue plunged 10% to $17.93 billion, missing forecasts of $18.127 billion.

“Expect FY ’21 expense to come down $1 billion to $53 billion which includes $3.7 billion of cost saves from efficiency initiatives and offsets from biz investments, revenue-related comps, and other items. Wells Fargo (WFC) expects restructuring charges to remain flat in ’21 vs. ’20 and notes that operating losses can be unpredictable with $1 billion currently baked into the guide. The guide looks in-line with cons. at $53 billion.”

At the time of writing, Wells Fargo shares traded 7.28% lower at $32.21 on Friday; the stock fell more than 40% in 2020.

On the other hand, the world’s largest asset manager BlackRock reported better-than-expected earnings in the fourth quarter with 11% increase in full-year revenue reflecting strong organic growth, record performance fees and 17% growth in technology services revenue.

Executive Comments

“Although our financial performance improved and we earned $3.0 billion in the fourth quarter, our results continued to be impacted by the unprecedented operating environment and the required work to put our substantial legacy issues behind us,” Chief Executive Officer Charlie Scharf commented on the quarter.

Wells Fargo Stock Price Forecast

Fifteen analysts who offered stock ratings for Wells Fargo in the last three months forecast the average price in 12 months at $34.23 with a high forecast of $40.00 and a low forecast of $27.00.

The average price target represents a 6.57% increase from the last price of $32.12. From those 15 analysts, nine rated “Buy”, six rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley gave a base target price of $40 with a high of $54 under a bull scenario and $20 under the worst-case scenario. The firm currently has an “Overweight” rating on the financial services company’s stock.

Several other analysts have also recently commented on the stock. Compass point raised the target price to $41 from $31. UBS upped their price objective to $41 from $23 and upgraded their ratings to buy from neutral. Citigroup raised the stock price forecast to $37 from $33. JP Morgan upped the target price to $32 from $31.

In addition, Wells Fargo & Company had its target price hoisted by Deutsche Bank to $37 from $35. The firm currently has a buy rating on the financial services provider’s stock. Credit Suisse Group raised their price objective to $35 from $33 and gave the company a neutral rating. At last, Barclays lifted their price target to $36 from $33 and gave the stock an equal weight rating.

Analyst Comments

“Wells Fargo (WFC) appears to be beginning to take action to restructure its business mix as it works to exit the Fed consent order/asset cap and reduce its expense base. While uncertainty remains around impact of business exits and timing of consent order/asset cap exit, we believe risk more than accounted for in the stock at 7.7x our 2022e EPS and 0.9x BV,” said Betsy Graseck, equity analyst at Morgan Stanley.

“WFC benefit to EPS from rising long end rates is the highest in the group, with each ~50bps increase in the 10yr driving ~4% to NII and as much as ~10% to EPS. We model WFC driving their expense ratio down to 66% by 2023 on reduced risk and compliance spend, operational efficiencies, and branch optimization. Lower expense ratio possible.”

Upside and Downside Risks

Risks to Upside: 1) New CEO’s financial targets higher than expectations. 2) Fed asset cap and consent order lifted in 1H21. 3) Business exits have minimal EPS impact and increase ROE. 4) Rates rise faster than forward curve – highlighted by Morgan Stanley.

Risks to Downside: 1) Fed does not lift asset cap until well into 2022+ 2) Business exits reduce EPS more than 10%. 3) Lower than expected operating leverage. 4) 10-year yield below expectations Macro environment remains challenging through 2021.

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